Microsoft Tablet? Yawn. Microsoft Shares? Yes

By Jack Hough

Microsoft (MSFT) seemed to do a karaoke cover of a two year-old Apple (AAPL) hit late Monday when it unveiled a tablet computer called the Surface.

The device looks like an iPad with a kickstand and a cover that doubles as a keyboard. Pricing and availability weren’t announced.

Getty Images

Stock investors have two reasons to keep expectations for the new device low. They’re called Zune and Kin, Microsoft’s 2006 music player and 2010 phone, both of which flopped.

But the stock market has a way of turning unsexy companies into alluring stocks. It does so by reducing share prices to modest levels relative to cash flows.

Microsoft has a stock market value of $250 billion, sits on around $40 billion in cash and generated more than $27 billion in free cash over the past year. Even if that rate slowed to $20 billion a year, the company would pay for itself in a decade.

The stock pays a 2.7% dividend and Microsoft in recent years has spent much more on share repurchases than dividends.

The challenges facing Microsoft are profound, of course. As websites take the place of locally installed programs, users become less dependant on running Microsoft’s Windows operating system, a key cash generator. And the company has largely missed out on the sweeping adoption of smartphones and tablet computers. Such devices take the place of personal computers for some, and introduce users to operating systems from Apple and Google.

To address these challenges, Microsoft later this year will launch a new operating system, Windows 8, that’s designed to work on personal computers and tablets. Its new Surface tablet computer may be as much an effort to showcase this software as to gain hardware sales. Meanwhile, Office 365 brings a cloud-based subscription model to the company’s popular productivity software. And Azure provides a computing platform for developers of other cloud-based programs.

The basic plan seems to be: Extract as much cash as possible from the old model of software sales while trying to build a large, stable income under the new model. Windows 8 is likely to provide a short-term boost. Wall Street expects profits for Microsoft to increase 15% during its next fiscal year, which begins at the end of this month.

The key for stockholders will be what happens in the following year–whether income from cloud-based platforms and services grows quickly enough to make up for expected declines in installed personal computer software.

That might make Microsoft shares seem risky. But the riskiest stocks are those with ambitious valuations based on uncertain profits–like Facebook (FB) at 58 times this year’s earnings forecast. At 11 times earnings, Microsoft is already priced like a company in decline, which means if it can merely preserve its income, to say nothing of growing it, the stock should pay off nicely.

That, however, hinges on the company doing wise things with its cash. Far more worrisome than its missteps with Zune and Kin was its 2008 offer to buy Yahoo at at 66 times earnings. Yahoo has lost nearly two-thirds of its stock market value since then. Whatever the prospects for Surface, it surely will do better than that.

Comments (5 of 17)

I got my copy of Postal 2 a few days ago, and have played it thogruh about halfway. Overall, the game is fun, but there is one big drawback the load times! It seems like every 2 or 3 minutes, I’m waiting for a section of the map to load. This can take up to a minute and a half, even though I turned down some of the settings and am running it on a 2 Ghz system. The graphics are good, if a little repetitive (there are only about 5 or 6 different NPCs, they just have different colored outfits on, and some of the indoor environments are kind of boring), and the gameplay is great. I found the controls easy and how you interact with the environment good. But, you can’t really go postal , because it’s too hard to kill your enemies. It takes several shots to kill anyone, even if you shoot them in the head. In fact, it doesn’t seem to matter where you shoot them. I found myself running away most of the time, just ’cause it’s easier.Overall A fun game, but the load times pretty much ruin it.

7:28 pm August 25, 2012

Beanca wrote:

I wanted to add soihtemng. You would use stock that pays enough dividends to about cover the interest. Secondly, this strategy only should be used if you have a great investment need for the money that will give you a substantial rate of return.

11:03 am June 20, 2012

Dave wrote:

@Harry you are obviously not a tech person. USB 2.0 is not supported by ARM, yet. So the basic Surface has 2.0. of course it will have GPS. I think you mean 3G or 4G. While that has not been announced, part of Windows 8 is the ability to meter your data when connected to a cell source. There is already an AT&T app so you can figure it out from there. Why should MS divulge EVERYTHING. Just because it is not explicitly stated as it has this or that means nothing. @John Hayward yes they captured something, it was your wallet.

11:26 pm June 19, 2012

MO wrote:

All the reporters @ Dow Jones I have come across so far seemed to be leagued against whatever MSFT does. They just can’t hide their biases. This is remarkeble. You have all the rights to be Apple cheerleaders. However, remember you are reporters,and you are supposed to report. You are not fortune-tellers, aren’t you? You have no idea about how MSFT’s stock or its products are going to be assessed by the public. Let customers be the judges. Your rhetoric against MSFT is unfair and frankly tiring.

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